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Pursuing An Insolvency Claim May Be Much More Expensive Following this Recent Decision (UK)

The recent case of Manolete Partners Plc v Hayward and Barrett Holdings Ltd [2021] EWHC 1481 (Ch) impacts both insolvency practitioners and assignees of insolvency claims, potentially making such claims more expensive to bring and a procedural burden by requiring (depending on the nature of the pleaded claims) two sets of proceedings, even though the claims arise from the same facts.

Although the judge reached his conclusions “with regret” and those conclusions essentially arise because of the constraints of the legislation, the findings are not helpful for insolvency practitioners seeking to pursue insolvency claims.  More so for smaller value claims given the additional disbursement costs and costs of two sets of proceedings, which could tip the cost/benefit scales against pursuing them.

Assignees of insolvency claims should also note the findings, although we have no doubt that litigation funders will do their best to find a workable solution to the problems that this case creates.

For those practitioners who are currently pursuing an insolvency claim, or have assigned the claim to a third party, using the procedure in the Insolvency Rules 1986 (the Rules), they should be alive to the fact that a respondent to those proceedings (or indeed the Court itself) may well ask the court to require payment of a court fee to continue the claim if part of the claim should have been issued using the Part 7 procedure (see further below), to remedy what this case has identified to be a procedural defect.

Insolvency Claims 

It has largely been common practice to issue all insolvency claims using the procedure set out in the Rules (Insolvency Application) instead of a Part 7 claim under the Civil Procedure Rules (CPR).  Many of those claims are ‘hybrid’ claims, where an officeholder (or assignee of those claims) pleads an antecedent transaction claim pursuant to the Insolvency Act 1986 (the Act) and a breach of duty claim in the alternative, under the Companies Act 2006.

There are procedural differences between a claim pursued under the Rules and the Act, but one of the main differences is that the court fee for pursuing such a claim under the Rules is significantly less than that required when issuing a Part 7 claim.  However, the upshot of the findings, in this case, means that two sets of proceedings may be required where part of the claim is based on claims that do not arise under the Act i.e. breach of duty claims under the Companies Act.  This is because the wording under the Rules provides that an Insolvency Application must state that it is made under the Act or the Rules.  Therefore for those claims that are often pleaded in the alternative – such as breach of duty – they cannot be pursued by making an Insolvency Application.

The claims in the Manolete case included ‘all and any claims that [Blackwater] may have…..such claims to include…..breach of duty at common law, breach of fiduciary duty or statutory duty or other legal or equitable duty, any claim in fraud, whether common law or equitable fraud, conspiracy by unlawful means and/or any claim under the Companies Act 2006’.  The court found that these claims should have been pursued as Part 7 proceedings under the CPR, not as part of an Insolvency Application under the Rules.

What does this case mean in practice?

Two sets of proceedings may now be required.  One for claims arising under the Insolvency Act/Rules (typically misfeasance and antecedent transaction claims), and the other under Part 7 (typically breach of duty claims under the Companies Act).

Who can bring what claim under which procedure now?

The findings, in this case, clarify that:

  • An officeholder or assignee can bring transaction avoidance proceedings (under s213, 214, 238, 239, 244 of the Act) as an Insolvency Application under the Rules;

  • Claims for breach of duty, or other claims not falling under the Act or the Rules must be brought using Part 7;

  • An officeholder must also bring a claim under s423 of the Act as a Part 7 claim

The case was also a useful reminder that an assignee cannot pursue a misfeasance claim because they do not fall within any of the categories of person able to make an application under s212 of the Act.  They are not a liquidator, official receiver, contributory or creditor.   The Court said that a distinction has to be drawn between (a) an assignment of claims vested in the liquidators and capable of assignment, (b) claims vested in the company and capable of assignment by the liquidators AND (c) claims that vest in the office of liquidator.  The office claims are not assignable.

What if the wrong procedure is used?

There is a potential remedy if the wrong process is used, the court has the power to remedy the procedural defect by ordering the applicant to pay the appropriate Part 7 court fee – but this is subject to the court’s discretion that is unlikely to be exercised if there is an abuse of process.

It is likely to be an abuse of process if any new claims are knowingly pursued by an Insolvency Application that ought to have been brought as a Part 7 claim,.  For claims already on foot, we will have to see how the Court and respondents to those claims respond in light of the findings in this case.

Solution?

Although the case is not helpful because it adds additional costs and procedural hurdles to the process of pursuing insolvency claims, it does not prohibit claims from being pursued.  To get around the procedural difficulties applicants can issue a Part 7 claim and an application notice and immediately apply for a transfer of the Part 7 claim to consolidate the proceedings. That said, this does not avoid the fact that a significantly increased court fee will have to be paid at the outset were part of the claim has to be brought under Part 7.

© Copyright 2021 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 161
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About this Author

Professional Support Lawyer

Rachael Markham is the professional support lawyer providing national and global support to the Restructuring & Insolvency team.

Rachael is responsible for precedents and know-how, organising and presenting internal and external training, responding to bespoke research enquiries, drafting and editing the restructuring and insolvency blog, producing articles for journals, providing support for BD projects, marketing and pitches, and producing a weekly bulletin on technical and practical issues that affect the Restructuring & Insolvency team.

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